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Politics and the Income Gap


In the course of the presidential primary debates, both Barrack Obama and John Edwards made continued references to the growing inequality of income and power in the United States, and in his acceptance speech, Obama singled out the "wealthiest" five percent of Americans for heavier taxes. While I've also been concerned about what Edwards called "the two Americas," the idea of addressing it by increasing taxes on the "wealthy" worries me greatly for a number of reasons.


First, as I noted in an earlier blog post, real "wealth" varies widely by geography and economic setting, and defining who is wealthy by an arbitrary number or percentage is every bit as erroneous as claiming that every member of one ethnic group is money-grubbing or that most young Black inner-city males are gang-members. Claiming that a New York City or San Francisco family [or families in any other number of high-cost cities] where both parents work full time and bring in a combined income of $200,000 are wealthy is absurd. That income can bring a very good life-style in much of America, but in New York and many other cities where tens of millions of Americans live, it's definitely middle-class and nowhere close to "wealthy."


Second, using taxation to address income inequality doesn't work very well, because those who are truly wealthy have the assets and abilities to avoid increased taxation, while those who are merely affluent are the ones who find themselves bearing the burden of lost income. For example, someone who makes, say $5 million a year, and who would face increased taxes of 10%, can pay an accountant $100,000 a year to find away to avoid the taxes, and save $400,000. It makes no sense for family making $200,000 a year and facing $20,000 more in taxes to hire that accountant, nor do they have the financial assets to deploy in alternative strategies, yet for purposes of the politicians, both families are "wealthy."


According to recently released IRS statistics, less than one half of one percent of Americans are "wealthy," meaning that they have assets including houses, of more than two million dollars. When a middle-class house in many cities can easily cost over $500,000 for less than 1,500 square feet, having $2 million in assets may make you "affluent," but it's far from "wealthy." Put another way, the "upper five percent" of Americans that Obama wishes to tax more heavily amounts to roughly fifteen million. According to the IRS, only ten percent of those are wealthy.


But the bigger problem with all of this is the assumption that taking money from those who are presumed to have it and putting that money into federal programs will do something to reverse the recent trends in income inequality.


Some claim that greater education will accomplish such a reversal, but during the last three quarters of a century educational opportunities and achievement for the less advantaged have improved, and yet the income gaps between the richest and the poorest have widened. Others suggest that great improvement in reducing barriers to women will help, but while not all of the barriers to women in high positions or in fields historically dominated by men have been removed, women have seen improvements in the opportunities and income available, and the income gap between rich and poor has still widened. The poorest Americans have far better housing than did the poorest Americans of a century ago and far better amenities in those dwellings. Even for the poorest of Americans, life is better than it was a half century ago.


So, with so many improvements, why has the income gap widened?


Have we become a more greedy society? That's hard to measure, but I find it difficult to believe that people are inherently greedier today than in the time of the Robber Barons.


Is it because of a "winner-take-all" culture that praises and rewards disproportionately those at the top in whatever field? That this has occurred isn't subject to debate. The pay received by the "average" business CEO is more than 300 times that of the "average" employee, a spread ten times what it was a half-century ago. In my own field of writing, look at the disparity between J.K. Rowling, with income of hundreds of millions, to any starting novelist with an average first-time advance of perhaps $5,000 to $10,000 for a year's [if not many years] worth of work. Look at the difference between the pay of the average actor [circa $10,000] and the $20 million plus per film for the top names. Or the NFL minimum compensation versus the tens of millions for glamour quarterbacks. Now... the counter is that the superstars "earn" that money; they bring in the readers that buy the books, the fans who fill the seats and purchase the DVDs. But... the superstars always did. It's just that with the growing purchasing power of Americans and the concentration of exposure through technology, the revenues that the superstars bring in are so much greater than in the past. In a very real sense, the combination of technology and greater disposable income means greater opportunity to make more money.


Add to that a culture where "worth" is measured more and more by money, by compensation, where business professors make twice what music and science professors do, all because they claim they can earn more in business. They doubtless can, but the comparative earning power in another field doesn't necessarily translate into teaching effectiveness. Nor do high salaries or compensation in one company mean that everyone in every other company is worth that. And when some of the highest paid corporate CEOs in the financial industry have racked up the largest all-time losses for their corporations, it's pretty clear that high compensation doesn't always translate into excellence... but it does translate into a significant income gap between those at the top and those in the middle and on the bottom.


Given these factors and a number more, I have real difficulty in seeing how greater taxation of the upper middle class and the affluent to fund government policies and programs is likely to have much impact on the income gap. It might reduce the deficit, but given the habit of politicians always spending more than they have, I have even greater doubts about that as well.


But... it's a great political issue, and I'm sure we'll hear a whole lot more about it over the next eight weeks.


Comments:
I am always suspect of people who want ‘income equality’, but appear to not know what it’s like to live one blown transmission, or one trip to the ER away from financial ruin. My kids would call themselves middle class, because we have a house, a car, and food in the refrigerator, yet we qualify for reduced price lunches in the schools. In a big city we would definitely be ‘poor’. Our state got rid of the tax on food for two years, as a test, and there are people in my office who complain it was the only ‘fair’ tax we had. But once again, the affluent don’t even notice the extra 5 cents on the dollar, its Starbucks change.

If education was truly the route out of poverty, a general laborer with a GED wouldn’t be making $2.00 an hour more than me with my Masters +. I’m having a hard time wrapping my head around the drive to shove everyone into a college education on one hand, and the rampant anti-intellectualism that scorns it on the other. And until government programs and policies are run to benefit the people rather than the computer system that maintains them, nothing is going to change.
 
The following research (Obama and McCain web sites and various business articles) on Obama and McCain tax plans might be useful.

Estate tax:
Obama: $3.5M single, $7M joint exemption, 45% above that (2009 levels).
McCain: $5M/$10M exemption, 15% above that.

Capital gains tax:
Obama: increase to 28% on those with incomes above $250K, otherwise leave the same.
McCain: leave the same or reduce to 0% in all cases.

Income tax:
Obama:restore to 39.6% (2000 level) for adjusted gross incomes above $250K (note that 39.6% level applied also to many incomes between $100K and $250K iirc between 1993 and 2000).
Tax rebate of $500 per working person or $1000 per 2-worker household.
McCain: leave as is.

Taxes on hedge fund managers:
Obama: originally said should be income tax (39.6%), not capital gains (15 or 28%); platform leaves these taxes as capital gains.
McCain: leaves as is or reduces.

Note also: the number of households reporting $250K of adjusted gross income or more is probably about 2% of all households, and the crossover point when people under Obama's plan start paying more than before is somewhere between $260K and $300K, depending on the amount of capital gains in the income calculation. And the number of people who might be affected is even less, since perhaps 1/4 of those households that might be affected are composed of two-person working couples neither of whom makes $250K personally, and that could elect to file separately.

Also, 3.7% of the returns listed more than $200K in adjusted gross income in 2007, so probably 2% of households with income are above $250K. About 70-75% of households had both spouses working, with the median wages of the woman being about 80-90% that of the man. And the Gini index of income inequality has moved sharply upwards since 1970, although it leveled off during the Clinton years. One reason, apparently, was the Earned Income Tax Credit, which lifted approximately 2% of households out of poverty (that is, was increased taxes on the high end income tax bracket was transferred to those in the bottom tax bracket rather than being spent by the government.

My conclusion is that (a) there will be less negative effect on $250K-or-more households from the Obama proposals than you expect; (b) tax collections from the wealthy are likely to be more effective than you think, and especially because I have received indications from tax lawyers that the IRS has been severely under-enforcing the last 8 years, and that is likely to change under an Obama administration; and (c) because of the tax rebate, a significant part of Obama's proposals will mean redistribution of money from those above $250K to those below, with the greatest percentage effect on the poorest, rather than going to increased government spending. You should also note that by some figures, the average income of those making above $250K has gone up by an average of 20% by some figures since 2000, providing significant additional revenue from people who will still be better off than in 2000.
 
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